Don't catch the US election fever

THE US Presidential election next year is beginning to grasp the attention of investors in London. The question is how to profit from it in a period when the American economy has been struggling for so long and markets have been flopping about.

For some British investors, the answer is fairly simple: if there is an election coming, the US economy must be recovering because the government will make sure that it does. In which case, buy.

Like most old saws about the markets, however, this one does not bear too much examination. You have only to look back at US elections for just over a decade to see the problem.

In the early 1990s, George Bush Sr had an apparently unassailable political lead. He was the victor of the first Gulf War and, despite raising taxes after promising not to, he had done little to antagonise the electorate.

But he had not reckoned with the economy, which took longer than expected to crawl out of the 1990-91 slump.

Indeed, jobs - always the key factor as far as the US electorate is concerned - did not start to pick up until about 1994. Bush Sr seemed unwilling, or unable, to do anything about it. This enabled Bill Clinton to step in with the slogan 'It's the economy, stupid' and win the presidency.

By the next election, the economy was in the middle of its longest period of expansion, which had been going on for several years by the time Clinton was returned.

The 2000 election, which George Bush Jr won so narrowly, was fought just as the US economy was diving into a recession that turned into one of the most prolonged periods of economic sluggishness on record.

Clearly, the timing of elections and economic recoveries does not coincide.

US analysts agree that the economy is often a key factor influencing elections but the idea that governments can engineer an economic recovery in the run-up to an election to win votes is a European view not shared by the US.

In Britain, governments wield enormous power over the economy. In the US, the government does not have the same power.

Politicians naturally want a rising economy to back their election efforts, but achieving it is another matter.

There seems little doubt the Bush Administration deliberately intended the tax cuts to produce a booming economy by election time next year. But the President is wielding a double-edged sword that could wound him badly.

The same tax cuts have swelled the government deficit, which could have a dampening effect on the economy by election time.

In the meantime, he has been powerless to do anything about rising unemployment, which could also undermine re-election hopes.

If George Bush gets the benefit, it will be more a matter of sheer coincidence and lucky timing than evidence of a reliable pattern.

British investors who buy simply because an election is looming do so at their peril.